The phrase ‘money laundering’ is descriptive. In its simplest non-legal terms, money laundering is “the processing of criminal proceeds (profits or other benefits) in order to disguise their illegal origin” (FATF). Another definition is “the process by which one conceals funds of dubious or illegal origin and then disguises them as the legitimate proceeds of lawful activities: (Oxford English Dictionary). The act of money laundering is predicated on the fact that the money has origins from illegal criminal activities. This money has to be converted into “legitimate capital”. This transition process has become a thriving business, albeit quite illegal in some, but not yet all, countries.
If the money being moved did not come from an illegal activity, then its handling and processing are not considered money laundering.
Money laundering has three aspects:-
- Placement: This is the physical disposal of proceeds (usually cash) from or for criminal activities. For instance, a drug trafficker may deposit a large cash down-payment into a lawyer’s client account to purchase a property. The objective of “placement” is to get the cash into non-cash economy.
- Layering: This is the process of separating illicit proceeds from the sources of crime, by creating complex layers of financial transactions designed to disguise the audit trail, thus providing the anonymity. For instance, the money launderer client may instruct his bank to pay the “dirty” money in his account to his lawyer and who, in turn, is instructed to make a series of payments to various parties overseas, in various jurisdictions and/or in multiple commercial transactions (e.g. fictitious “export-import” transactions). The objective of “layering” is to make the detection of the “dirty” money as difficult as possible, to confuse the audit trail and to break the link between the criminal and his/her proceeds of crime.
- Integration: This final process is to bring back (or integrate) the “dirty” money into the legitimate system as “clean” or legitimate money (hence having successfully “washed” the money). One way to do this is for the money laundering client to use his cash-rich account in a bank to buy over a successful business. The objective is to move the “dirty” money into the legitimate economy in such a way, that no one suspects its origin. This is the ultimate objective of every money launderer.
II. Concern For Money Laundering
Any business, whether a financial institution, professional practice or other enterprises, caught in the web of money laundering could have its reputation irreparably damaged. Its directors, management and staff could be the subjects of private and public investigations out of which prosecutions could arise. At best, it would be a public relations nightmare. It only takes one unethical person to jeopardise an entire organisation. A reputation for integrity takes many years to build, and only a few moments to damage, debase, decimate or destroy.
Virtually all businesses would be wise to be alert to money laundering methods and tactics. For their own protection and preservation, businesses must build and implement defenses and countermeasures, and install various other forms of protection.
While anti-money laundering laws have been or are being adopted in over 100 countries around the world, no country yet requires its financial institutions to detect money laundering. Pragmatically, the most they can do is to require that “suspicious transactions” be reported, subject to a plethora of regulations and policies. Despite the pressing need, especially with terrorism related financing, the effectiveness of anti-money laundering laws has been mixed, falling far short of the ideal of strict, fair and universal enforcement with well-knit international cooperation within and between governments, regulatory and supervisory authorities, law enforcement agencies, the judiciary and ever the private sector. As usual, vigorous enforcement is limited to too few countries.
III. History of Money Laundering
The term money laundering is of relatively recent origin. In their modern context, anti-money laundering precepts and laws were originally only aimed at the disposing of the proceeds of the trade in narcotics. Though hiding money has been around probably since currency was invented, the US, in 1986, was the first country in the world to criminalise money laundering but only as it related to the illegal drug trade. Singapore enacted its first anti-money laundering legislation in 1992, the predecessor to the Corruption Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act.
It was soon realised that the ill-gotten proceeds of extortion, bribery and fraud also needed international cooperation and legislation to inhibit money laundering, to track and recover the illegal money, and to prosecute offenders. With the onset of globalisation, instantaneous electronic money transfers, the growth of organised crime, corruption and other serious crimes involving money, money laundering practices flourished.
Besides narcotics production and trafficking, and depending upon the selection by each country of which serious crimes to include in their own national anti-money laundering enactments, there is a vast array of nefarious activities which generate questionable profits and which are or could be addressed in anti-money laundering legislation. Examples are participation in an organised criminal group and racketeering; terrorism, including terrorist financing; trafficking in human beings and migrant smuggling; sexual exploitation, including sexual exploitation of children; illicit trafficking in narcotic drugs and psychotropic substances; illicit arms trafficking; illicit trafficking in stolen and other goods; corruption and bribery; fraud; counterfeiting currency; counterfeiting and piracy of products; environmental crime; murder, grievous bodily injury; kidnapping, illegal restraint and hostage-taking; robbery or theft; smuggling; extortion; forgery; piracy; and insider trading and market manipulation. While lengthy, this list (taken from FATF’s 40 Recommendations 2003) is neither exhaustive nor all-inclusive.
Though the above list is extensive, individual countries specifies in its domestic statutes those serious crimes which are to be subject to its anti-money laundering laws.
IV. The International Efforts
In 1989, the G-7 countries created the Financial Action Task Force (“FATF”), an independent inter-governmental agency. Their website is at http://www1.oecd.org/fatf/index.htm. Among its members are 31 countries including the principal major economies, and two regional organisations. The purpose of FATF is to examine and report on measures to combat money laundering, to monitor implementations of counter money laundering measures, to track and review money laundering activities, and to promote FATF activities and advise members and non-member countries. Its headquarters are located within the OECD in Paris, France. Singapore joined the Financial Action Task Force in 1991.
In 1990, the FATF issued its Forty Recommendations which “provide a comprehensive blueprint for action against money laundering, covering the criminal justice system and law enforcement, the financial system and its regulation; and international cooperation” (FATF). Amended in 1996 to reflect changes in money laundering trends and potential future threats and again in 2003 to include terrorism financing, the Forty Recommendations are the most comprehensive set of anti-money laundering directives yet created for governments, legislatures, law enforcement, financial institutions and businesses in general.
Other international and regional bodies have issued or adopted similar guidelines, in whole or in part, namely, the United Nations and several of its specialised agencies, the International Organization of Securities Commissions, the European Union (EU), the Council of Europe, Gulf Cooperation Council, Organization of American States (OAS), Caribbean Financial Action Task Force (CFATF), South Pacific Forum, Asia/Pacific Group on Money Laundering, Council for Security Cooperation in the Asia-Pacific (CSCAP), INTERPOL, ASEANPOL, World Customs Organization (WCO), Southern and Eastern Africa Financial Action Task Force (SEAFATF), Bank for International Settlements (BIS), Basel Committee on Banking Supervision, International Banking Security Association, Banking Federation of the European Union, Organization for Economic Cooperation and Development (OECD), among others. In other words, with the concepts of good governance, transparency and accountability being adopted into the work-a-day realms of the public and private sectors, as demanded by civil society, anti-money laundering policies and practices are finally gaining the attention of governments and international organisations throughout the world.
The bribery of foreign public officials to obtain or maintain business was criminalised first in 1997 in the US embodied in the now famous “Foreign Corrupt Practices Act”. Twenty years later, the OECD issued its “Convention on Combating Bribery of Foreign Public Officials in International Business Transactions”. In late 1998, this Convention came into force, having been ratified by the required number of signing countries.
V. Money Laundering Techniques
The techniques of money laundering can be broken down into three principal categories: banking, non-bank institutions, and non-financial businesses. The methods are summarised as:
- large deposits and transfers
- false name accounts
- accounts of friends, relatives and cronies
- smurfing (electronic structured transactions of electronic cash)
- shell and front companies, usually offshore, for layering transactions
- lawyers, accountants, consultants, trustees, fiduciaries
- “collection accounts”
- acquiring compliant banks
- “payable through accounts”
- “loan back arrangements”
- telegraphic transfer
- bank drafts, money orders, cashier’s cheques
- cash deposits and withdrawals, business transactions, smuggling across borders
- travelers cheques
- Internet banking and electronic purse accounts
- Non-Bank Financial Institutions
- bureaux de change, exchange offices, casa de cambio
- money remittance services (giro houses)
- underground banking; “hawala”, “hundi”, chit and chop shops which handle illegal foreign exchange transactions in India and East Asia
- single premium insurance products
- postal services – money orders, packages (for smuggling cash)
- Non-Financial Businesses or Professions
- professional facilitators, e.g. lawyers, accountants, financial advisors, notaries, secretarial companies, trustees and other fiduciaries
- systems based on trust and loyalty
- real businesses – false invoicing, co-mingling of legal and illegal money, loan back arrangements, layering of transactions through offshore shell companies, false import/export declarations
- commercial trade transactions through Free Trade Zones
- casinos, bookmaking, Internet casinos
- real estate companies
- purchase and cross border delivery of precious metals
- use of warrants in the metals market
VI. Deterrence and Counter-Measures
There are several concepts of deterrence which have recently garnered broad support. Businesses should consider working them into their own normal accounting and financial control systems. Money laundering can occur innocently as well as deliberately.
The first step is to access your own risk profile and vulnerability to being used for money laundering; check your internal control systems, policies and operations. Establish internal anti-money laundering policies and procedures and put senior people in charge of compliance and staff training.
The fundamental theme common to most of the countermeasure initiatives is the old maxim of “Know Your Customer“ and “Know the Counter Partners“: identify and verify them through third party due diligence. And maintain files on them. Know who you are dealing with at both ends of a transaction.
“Know Your Business“ is another vital concept. Protect your integrity and reputation. Know how, when and where to recognize unusual transactions.
“Know your Administration“: accurate and complete record-keeping and reporting compliance is crucial to keep your own business and the anti-money laundering system functioning. Create audit trails. Audit to test and track your own anti-money laundering compliance systems.
Recognise suspicious transactions and transaction sizes and report them to internal compliance officers and the competent authorities in accordance with anti-money laundering regulations, laws and policies. Check the suspicious indicators lists for guidelines.
Educate, train and test employees to create and maintain their awareness.
Be forewarned that it is not just corporate reputations which are at risk for allowing money laundering to occur, but officers, directors and other individuals involved can face prison terms, substantial fines, and unusual confiscations. One unscrupulous renegade in an organization can taint all the honest people in that organization. The costs of reputation repair and recovery are enormous, far outweighing the costs of precaution.
VII. Non-Cooperative Countries and Territories (NCCTs)
The FATF is engaged in a major initiative to identify non-cooperative countries and territories (NCCTs) in the fight against money laundering. Specifically, this has meant the development of a process to seek out critical weaknesses in anti-money laundering systems which serve as obstacles to international co-operation in this area. The goal of this process is to reduce the vulnerability of the financial system to money laundering by ensuring that all financial centres adopt and implement measures for the prevention, detection and punishment of money laundering according to internationally recognised standards.
On 14 February 2000, the FATF published an initial report on NCCTs. The report sets out twenty-five criteria, which help to identify relevant detrimental rules and practices and which are consistent with the FATF Forty Recommendations. It describes a process whereby jurisdictions having such rules and practices can be identified and encourages these jurisdictions to implement international standards in this area.
The next step in the NCCT initiative was the publication in June 2000 of the first Review identifying specific NCCTs. The report named 15 jurisdictions (Bahamas, Cayman Islands, Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, Marshall Islands, Nauru, Niue, Panama, Philippines, Russia, St. Kitts and Nevis, and St. Vincent and the Grenadines) as having critical deficiencies in their anti-money laundering systems or a demonstrated unwillingness to co-operate in anti-money laundering efforts.
The list of 6 non-cooperative countries and territories (as of 12 July 2004) are Cook Islands, Indonesia, Myanmar, Nauru, Nigeria and Philippines. It is unfortunate that the list includes 3 ASEAN countries.
VIII. The Corruption Drug Trafficking And Other Serious Crimes (Confiscation of Benefits) Act And Other Related Legislation
In Singapore, The Corruption Drug Trafficking And Other Serious Crimes (Confiscation of Benefits) Act (“the Act”) makes money laundering an offence although the Act itself does not use the word ‘money laundering’. The Act, when initially passed in 1992, criminalised the laundering of benefits from drug trafficking. In 1999, it was extended to cover benefits derived from corruption and ‘criminal conduct’. Criminal conduct are serious offences, other than drug trafficking, committed in or outside Singapore. The Second Schedule of the Act lists 182 offences as serious offences. The Act also provides that prosecution need not prove that the accused had actual knowledge that he was dealing with proceeds from drug trafficking or criminal conduct, just that the accused had ‘reasonable grounds to believe’ that the procceds were so derived.
There are five basic money laundering offences in the Act:-
- Assisting another to retain the benefits of drug trafficking or criminal conduct – Sections 43(1) and 44(1) of the Act.
- Concealing or transfering benefits of drug trafficking or criminal conduct – Sections 46(1) and 47(1) of the Act.
- Acquiring benefits of drug trafficking or criminal conduct – Sections 46(3) & (5) and 47(3) & (5) of the Act.
- Tipping-off – Section 48(1) & (2) of the Act.
- Failure to disclose knowledge and/or suspicion that any property is derived from drug trafficking or criminal conduct – Section 39(1) of the Act.
The Act also allows the court to make a confiscation order against a person who has been convicted of a drug trafficking offence or a serious offence to deprive him of property held by him or by another person who has received the property as a gift from him. Apart from the confiscation order, a restraint order or charging order can also be made to ‘freeze’ such property or proceeds thereof pending the conclusion of drug trafficking or serious offence proceedings.
The Act has provisions that give assistance to those called on to investigate money laundering activities in Singapore and elsewhere. An authorised officer (police office or any officer of the CNB, CPIB or CAD) can apply to court for a production order requiring a person to produce relevant materials to the authorised officer or allowing them to have access to such materials. A production order can be made against any financial institution on application of the Attorney-General of Singapore. Information so disclosed by a financial institution would not be in breach of any secrecy or confidentiality obligations.
In addition to the Act, Singapore also has the following legislation that deal with money laundering: (a) The Terrorism (Suppression of Financing) Act 2002; and (b) The United Nations Act 2001 and the United Nations (Anti-Terrorism Measures) Regulations 2001.
IX. International Co-operation
Due to the international nature of money laundering, section 41 of the Act empowers the sharing of information with foreign intelligence units provided that there is a rior arrangements between Singapore and that country.
In 1999, during a meeting of the FATF, Singapore was encouraged to enact a dedicated mutual assistance law. This resulted in the Mutual Assistance in Criminal Matters Act 2000. Under this Act, any anti-money laundering authority of a prescribed foreign country may get assistance from Singapore concerning (among others) production orders, search warrants and enforcement of confiscation orders. A prescribed foreign country is one with whom Singapore has a mutual legal assistance treaty.
X. Industry Specific Guidelines
The Monetary Authority of Singapore (MAS) has issued guidelines that cover the financial sector. Guidelines have been issued for:-
- Banks: Guidelines on Prevention of Money Laundering for Banks (MAS 626) dated 22 Feb 2000 issued under Section 54A of the Banking Act;
- Merchant Banks: Guidelines on Prevention of Money Laundering for Merchant Banks (MAS 1014) dated 22 Feb 2000 issued under Section 28(4) of the Monetary Authority of Singapore Act;
- Finance Companies: Guidelines on Prevention of Money Laundering for Finance Companies (MAS 824) dated 22 Feb 2000 issued under Section 30 of the Finance Companies Act;
- Life Insurers: Guidelines on Prevention of Money Laundering for Life Insurers (MAS 314) dated 22 Feb 2000 issued under Section 28(4) of the Monetary Authority of Singapore Act;
- Dealers and Investment Advisers: Guidelines on Prevention of Money Laundering for Dealers and Investment Advisers dated 22 Feb 2000 issued under Section 28(4) of the Monetary Authority of Singapore Act; and
- Future Brokers, Futures Trading Advisers and Future Pool Operators: Guidelines on Prevention of Money Laundering for Future Brokers, Futures Trading Advisers and Future Pool Operators dated 22 Feb 2000 issued under Section 28(4) of the Monetary Authority of Singapore Act.
The guidelines reflect the principles set out in Part VI of this article. On 3rd January 2005, MAS has issued a consultation paper on updating and strengthening the anti-money laundering regime.
The Law Society of Singapore first issued Guidance Notes on money laundering to lawyers in September 1998. In March 2003 these were updated to cover recent legislation and the “Guidelines On Prevention Of Money Laundering And The Funding Of Terrorist Activities” were issued. The Guidelines are intended to guide solicitors identify suspicious transactions and determine when there is an obligation to make the appropriate suspicious transaction reports to the authorities. In due time, a version of these guidelines will be legislated to give them the force of law.
Money laundering is BIG business. Should your business inadvertently, directly or even indirectly, become a victim of or a participant in any serious offence, the chances are high that your money will disappear through one or more money laundering ploys. Finding your money and recovering it will be time consuming and expensive, and for some, most embarrassing.
Protect yourself and your integrity with the “Know Your” principles set out in Part VI of this article. Anti-money laundering laws need time to prove their effectiveness, and international cooperation between governments is only now being established. Such laws, practices and cooperation have to work if legitimate business is to survive and prosper.
Finally, we have a list of websites with information on money laundering:-
- Financial Action Task Force (“FATF”)
- University of Exeter: Biblography & Links
- University of Exeter: Useful Links
- Transparency International
- Commercial Crime Services of the ICC
- Billy’s Money Laundering Information website
- Financial Crimes Enforcement Network
- International Money Laundering Information Network (IMOLIN)